The Exchange Rate

Interest rates affect domestic monetary conditions and thus borrowing, consumer demand, investment, output and ultimately prices. They can also have an effect on the value of sterling in terms of foreign currencies. Other things being equal, higher interest rates will tend to attract foreign funds into sterling, and thus increase the sterling exchange rate against other currencies.

The Bank can try to influence the exchange rate using the country's gold and foreign exchange reserves. Management of the reserves is carried out by the Bank on behalf of the Treasury. The reserves are held in a government account called the Exchange Equalization Account, which was set up in the 1930s after Britain left the gold standard: its purpose was and remains to check undue fluctuations in the external value of sterling. This process, known as intervention, involves the Bank buying sterling in exchange for foreign currencies when it wants to curb a fall in sterling - or alternatively selling sterling if it wants to curb a rise. These operations cannot exactly determine the course of sterling in the markets: there are many other influences, and commercial dealers can exert very substantial upward or downward pressure on a currency which official intervention on its own may have difficultly reversing.

As a member of the ERM from 8 October 1990, the UK was obliged to keep sterling within agreed bands relative to other European currencies. The UK's membership of the ERM was suspended on 16 September 1992, since when sterling has been allowed to float freely against other currencies.

Дата добавления: 2015-07-20